Governor’s statement following the ECB’ monetary policy meeting

In the face of the challenges presented by the Covid-19 pandemic, the economic situation in euro area countries, Slovenia included, remains serious. In contrast to the first wave, when industry also suffered a major decline, it is mainly services that have been hit in the current winter wave. The situation on the financial markets remains stable, amid the monetary policy support put in place by the Governing Council last year. There was also an improvement in government borrowing terms in Slovenia, and Slovenian banks have been allowed to provide favourable financing conditions for businesses and households.

In these circumstances, the Governing Council has decided to reconfirm its accommodative monetary policy stance. In this way we will continue to ensure lending to all sectors, thus supporting economic activity and ensuring price stability over the medium term.

Amid the bad epidemiological picture, the service sector in the euro area again slid into deep recession at the turn of the year. This is in line with the ECB’s December projections, which do not anticipate any significant improvement in the early part of this year. In contrast to the first wave, when industry also suffered a major decline, it is mainly services that have been hit in the current winter wave. In Slovenia too the epidemiological situation remains bad, and dictates the retention of the containment measures, which in the final quarter of last year triggered a renewed decline in economic activity.

Inflation in the euro area stood at 0.3% in 2020, but monthly rates have been negative since August. The worsening health crisis gave rise to additional deflationary pressures through the decline in economic activity, which had been forecast in the December projections. The Slovenian economy saw deflation in the amount of 0.3% in 2020. The largest factor in the deflation was the downturn in the foreign environment, with the continual weakening of domestic inflation factors driven primarily by the containment measures. Similarly to the euro area overall, falling energy prices were to the fore.

The additional monetary policy support is playing a part in the buoyancy of the financial markets, which is helping to maintain the favourable financing conditions for all sectors. The optimism engendered by the rollout of vaccines was another factor in the calm on the financial markets as they entered the new year; yields in numerous asset classes not only reached their pre-epidemic levels, but also hit record lows in many cases. There nevertheless remain certain risks, including the uncertainty surrounding the future evolution of the health situation.

At this month’s meeting the Governing Council decided to reconfirm the ECB’s accommodative monetary policy stance, which has been effected through measures put in place last year, most recently in December. In addition we continue to stand ready to take further action as appropriate. Our measures, most notably the pandemic emergency purchase programme (PEPP) and the targeted longer-term refinancing operations (TLTRO III), are providing favourable financing conditions for the banking sector and the non-banking sector, and for Eurosystem governments, thereby supporting economic activity and ensuring price stability over the medium term.

Slovenia’s terms of borrowing have also improved, thanks to extensive monetary policy support: 10-year Slovenian government bonds were issued at negative yields for the first time in January of this year. Their sound liquidity and capital positions and low funding costs are allowing Slovenian banks to maintain favourable terms for lending to businesses and households.